BEE runs into unintended consequences
BLACK economic empowerment (BEE) has been South Africa’s tool to rectify an exclusionary past and has given the face of business some colour, but experts say the policy model had damaging unintended consequences and left 42% of black people jobless.
Due to affirmative action policies, South Africa has managed about 21% black ownership of the top 100 listed companies, building a black middle class with spending power of about R400-billion, compared to the white middle class that has R80-billion less to spend, and about 40% of university degrees are now held by black graduates.
The problem is that the larger majority of black South Africans still live in abject poverty, while BEE has led to unintended consequences, like fronting and a brain drain of many specialised skills out of the country.
BEE and some labour laws have made it virtually impossible to get rid of non-productive or surplus employees , and made South Africa less attractive to foreign investors.
According to Ramsay-Media research head Alan Todd, the BEE model in its current form was not sustainable because of these unintended consequences.
Todd said BEE policies rendered South African firms less competitive than foreign firms that did not have to abide by the same rules.
“There is almost no doubt that the problem that BEE strives to solve, needs to be addressed far earlier than entrance into the job market. The government needs to make radical improvements to the entire education system, starting with primary education, to provide a solid base for the development of better technical skills for all children. They need to instil entrepreneurialism and make it easier for people to start businesses.”
Research by Todd and his team showed that 72% of entrepreneurs in South Africa were white compared with only 20% who were black. “BEE has encouraged skilled black people to take the safer, more secure route of working in the formal sector rather than start their own businesses, reinforcing white domination of business ownership in SA,” the Top-End survey said.
Gavin Heartford, an old union man and facilitator of big broadbased BEE deals, agreed that one could question the sustainability of the BEE model if one considered “the fact that South Africa is one of the most unequal countries in the world and takes into account that masses of South Africans still don’t have any buy-in into the economic cake”.
“In my opinion, government isn’t really looking to create loyal and sustainable empowerment in ways that could also improve the attractiveness and profitability of business for all shareholders. South Africa needs business to grow in order to produce jobs in line with our National Development Plan that is aiming to generate 5 million jobs. Instead, BEE ends up being an extra cost to doing business.”
SA managed only 0.9% growth in the first quarter of the year.
KPMG partner Pop Motsisi said it was difficult to measure the cost to business of complying with BEE policies. KPMG’s latest BEE survey showed that 35% of respondents (companies) that were implementing BBBEE were carrying a cost of less than 0.5% of turnover, while 30% carried a cost of between 0.5% and 2% of turnover.
The highest costs incurred in implementing BBBEE are between 10% and 20% of company turnover.
The survey also showed that only 15% of companies measure any economic benefit of BBBEE compliance to their business.
“This brings forward the fact that BBBEE is still largely perceived as a cost rather than an advantage,” said Motsisi.
Some of the more costly elements of BBBEE include skills development that has to make up
BEE encouraged skilled black people to take the safer, more secure route of working in the formal sector than start businesses
3% of a companies payroll. Skills development is also important if one considers that a company that employs more than 50 people has to have a workforce that is 75% black in terms of employment equity.
Heartford suggested looking at a model in which a company secured a portion of its profits for employees and communities that could then be converted into equity.
He further suggested that government look at a way to build savings for the poor and some kind of annuity income by investing a portion of company payouts to employees. “It doesn’t help that everyone buys a car and then it’s all gone again. We need to educate and assist these communities with savings, so that they do not end up in the same poverty where they were when they started working 40 years ago.”
Empowerdex director Steven Hawes said although aspects such as big black ownership deals could never address the core structural problems in society, he was upbeat about a new focus on enterprise and supplier development and skills development.
“Companies are now embracing these aspects of BBBEE with a sense of focus. These are some of the key factors that will help position South African small businesses competitively in the future and thereby drive employment and wealth creation,” he said.